Almost all contracts entered into by our clients contain the clause “Time is of the essence”. This basically means that your covenants and obligations must be completed within the time frame agreed to in your contract. The following are a few examples of clauses in contracts, whether real estate or business contracts where you must meet your contractual obligations within the time specified in the contract:
1. You purchase or sell a property with a specified closing date. You, as a purchaser, may find yourself at the specified closing date, not able to close due a delay in financing. You ask your lawyer to request that the other side amend the agreement and extend the closing date. Alternatively, you may have other conditions in the contract that have to be waived within a set time, e.g. your contract may be conditional upon you arranging financing by a certain date. If you miss the dates you may have your deposits forfeited and have the agreement terminated.
2. You may be a tenant under a lease which states that you must exercise an option to renew no later than six (6) months prior to the end of your current term. What if you miss exercising the option? You may lose your option and your premises at the end of the current term.
3. You are a dentist and are purchasing a dental practice or shares of a dentistry professional corporation. The agreement will contain many dates that things have to be completed by. For e.g., completing due diligence, arranging financing, closing date. If you miss the dates you may have been deemed to have waived conditions or may lose your deposit and the practice.
We are dealing with more and more clients who are not complying with the time periods noted in their contracts and simply either ignore the time periods (expecting that the other side will do nothing) or phoning us and requesting that we ask the other side to amend these dates. What if the other party refuses? Please note the recent case below.
2336574 Ontario Inc. v. 1559586 Ontario Inc., 2016, ONSC 2467
There was a recent case, 2336574 Ontario Inc. v. 1559586 Ontario Inc., 2016, ONSC 2467 that dealt with this problem. The parties entered into an agreement of purchase and sale for a commercial condominium. The agreement provided that if the purchaser defaulted the deposit funds would be forfeited to the vendor as damages. The precise closing date was left to the vendor to set (this was a new build condominium with a provision that permitted the vendor to set the closing date when he completes construction).The purchaser paid deposits totalling $40,000.00 and a further $31,999.50 on the interim occupancy closing. The vendor unilaterally set a final closing as permitted by the contract. The purchaser asked for a brief extension of the final closing date without giving a reason. The purchaser missed the closing date by one day and the vendor then refused to close and the deposit of approximately $40,000.00 was forfeited to the vendor. The purchaser brought legal action for specific performance, i.e. asking the court to force the vendor to sell the unit to the purchaser and for relief from the forfeiture of the deposits. The vendor on the other hand sued for a declaration that the agreement was at an end and that the purchaser had forfeited the deposits. Each party also accused the other party of failing to act in good faith.
The court dismissed the purchaser’s motion and granted the vendor’s motion. The court stated that where the parties have a long-term, ongoing relationship, a level of good faith may be expected that imposes flexibility and obligations beyond the letter of the contract. Where they are commercially experienced buyers and seller in a discreet, one-off transaction, the level of contract adherence would not be expected to vary from the strict contractual terms. In this case the court found that the parties were commercially experienced and were involved in a one-off real estate deal. Good faith meant sticking to the contract.
Summary
In regard to real estate we are finding vendor builders more and more reluctant to extend closing or amend contracts, therefore requiring purchasers to comply strictly with the dates (especially the closing date) set out in the contract. You cannot expect to be able to extend closing dates and must be ready to close on time.
In regard to purchases of businesses or shares of corporations such as dental practice purchases there are many specified dates that seem to be ignored more and more by both our clients and the other side and their solicitors, with both parties and their solicitors seemingly of the view that dates are not importance.
When you have “time of the essence” clauses in the agreements dates are important and you could find yourself with your deposit being forfeited or losing the transaction. We try to impress upon our clients the importance of dates and getting things done within the time frames set out in the agreements.
Please feel free to contact us to discuss any of your legal needs. The following blog post is not to be construed as legal advice and is for informational purposes only.